Yesterday HKEx announced 3 new candidates for elections at next Tuesday's AGM, leaving practically no time for institutional shareholders to respond before their custodians close the voting window. Two of the candidates are backed by broker associations, who already have 4 members on the board. We call on the Chairman, if he believes in corporate governance and shareholder equality, to adjourn the AGM for 14 days to allow all shareholders time to submit new voting instructions on the elections.

HKEx should adjourn the AGM
9 April 2003

Hong Kong Exchanges and Clearing Ltd (HKEx, 0388) yesterday announced that 3 new candidates have come forward for election as directors at the Annual General Meeting which has been convened for 4.30pm on Tuesday 15-Apr-03. As a result, it is sending out a supplemental circular to shareholders, which was not posted on its company announcements web site until 15:01 yesterday, HK time. A new proxy form was also issued.

The three candidates were each nominated by shareholders (whose identity has not been disclosed) under Article 90(2)(b) of the Articles of Association of HKEx, the same article used to nominate editor David Webb three weeks ago, as explained in our article HKExciting. The Articles allow directors to be nominated by shareholders only "not less than seven nor more than twenty-eight clear days" before the date of the AGM.

The new candidacies in two cases represent a last-ditch effort by the broker associations to squeeze out the investor-based candidacies of David Webb and Oscar Wong (CEO of BOC-Prudential Asset Management Ltd), and take advantage of the compressed timetable as we explain below.

The first candidate, Henry Chan (Mr Chan), is a Vice-Chairman of the Hong Kong Stockbrokers Association (HKSA) which already has 3 representatives on the board - Paul Fan Chor Ho, former Chairman of the HKSA, Dannis Lee Jor Hung, "Permanent Honorable President" of the HKSA and Yue Wai Keung (Mr Yue), a director of HKSA. All three are standing for re-election.

The second candidate, Kenneth Lam Kin Hing (Mr Lam), is a deputy Chairman of the Institute of Securities Dealers Ltd (ISD). Vincent Lee Kwan Ho (Mr Lee), an incumbent director, is a Vice Chairman of the ISD. If all these candidates are elected, the board of HKEx would look more like the brokers' union. Indeed, in this morning's South China Morning Post, Mr Lee was quoted as saying that the two associations had held negotiations on forming an alliance to contest the six seats - but failed to reach an agreement. Both Mr Lee and Mr Lam have reportedly received the backing of Choi Chen Po Sum, the Chairman of the ISD who in the 1990s was acquitted in court on bribery charges in relation to the approval of transfer of Stock Exchange seats while she chaired the membership committee of SEHK.

Incidentally, Mr Lam was recently prosecuted by the SFC for breaking the law on disclosure of interests. In 2000, Mr Yue was publicly reprimanded by the SFC for compliance breaches in his brokerage.

The third candidate is David Parker, the Chief Operations Officer of Sun Hung Kai & Co Ltd, one of the larger retail brokerages, and at least does not appear to be acting in cahoots with the other two. If he had come forward sooner, we might have been more supportive.

Exploiting the Voting Timetable

Most retail and institutional investors hold their shares through a bank, broker or custodian who in turn hold them in an account with the Central Clearing and Automated Settlement System (CCASS) operated by Hong Kong Securities Clearing Co Ltd (HKSCC), a subsidiary of HKEx. In turn, HKSCC Nominees Ltd, a subsidiary of HKSCC, is the registered shareholder of listed companies and acts as nominee for the account holders of CCASS.

CCASS has a proprietary electronic voting input system for custodians, banks, brokers and investor participants (the latter being the few retail investors who hold their stock directly rather than via a bank, broker or custodian).

It was not until this morning that CCASS amended its voting system to display the 3 new proposed resolutions (to elect each candidate), and extended the voting cut-off by one day, to Friday 11-Apr-03. The system shuts at 15:45 (HK time) each day. So there are now only 2 days left in which to input voting instructions.

In our enquiries today, a spokesman for HKSCC said that they will not honour previous voting instructions given by participants unless they receive revised instructions by Friday (being instructions either to accept the old votes or providing new ones). This is unacceptable as it risks discarding votes that were already made in good faith. Put simply, anyone who gave instructions up to yesterday did so in the belief that they would be followed, and it would be a miscarriage of justice if those instructions were now discarded, just because they were unable to comply with a new 2-day voting window. In addition, HKSCC is a subsidiary of HKEx and it would raise questions of whether they have followed investors instructions or internal (management) policy on which votes to accept.

There is absolutely no way that most institutional and retail investors will be able to meet this new timetable. At the latest, custodians will have to cut off voting on Thursday afternoon, 1 day from now, in order to have time to process their instructions.

The typical 7-stage process for voting is:

  1. Listed company sends circular and proxy form to registered shareholders, including HKSCC, by postal mail.
  2. HKSCC updates its voting input system, and sends notification to custodians, banks and brokers of proposed resolutions (normally this takes a few days, but this time they have done it in 1 day).
  3. Custodians prepare letters or faxes to clients, summarising the proposals in proprietary format and seeking instructions on how to vote the shares (allow a few days)
  4. Asset managers receive letters or faxes from custodians, and consider how to vote, often through internal committees (allow a few days)
  5. Asset managers tell custodians how to vote. (Allow 1-2 days for custodians to aggregate instructions from all clients).
  6. Custodians tell CCASS (HKSCC) how to vote (Allow 1 day for CCASS to aggregate instructions from its participants)
  7. HKSCC Nominees Ltd fills in its proxy form to vote its shares, and submits it by the deadline (48 hours before the meeting). In this case, that falls on a Sunday, so the practical deadline is Friday.

This is why investors need the full 21-day timetable normally given to them as notice period for an AGM, and are usually working at a stretch to meet the 14-day notice period for some EGMs.

This fact cannot have escaped the attention of the broker candidates. They know that their supporters, almost all of whom are brokers in Hong Kong with their own CCASS input terminals, will be able to vote by Friday, in favour of their own new candidates, and that most institutions will not be able to respond in time to vote against. This election is being held on a "net votes" system, where the votes will be tabulated as the sum of votes in favour minus votes against, and the 6 highest scores will win. This timetable makes it grossly unfair to the existing candidates and to the institutional investors who will be unable to express their opinions on the new resolutions. Supporters of Webb and Wong would likely vote against the new candidates, if given the opportunity to vote.

Adjournment should be required

The Listing Rules of Hong Kong, weak as they are, do set out "General Principles" in Rule 2.03 which include that "all holders of listed securities are treated fairly and equally". Rule 2.04 goes on to state "It is emphasised that the Exchange Listing Rules are not exhaustive and that the Exchange may impose additional requirements...whenever it considers it appropriate."

In this case, the only way for all shareholders to be treated "fairly and equally" and justice to be done is to give them all sufficient time to consider the new resolutions, by adjourning the AGM for at least 14 days.

Article 69(2) of HKEx states:

"the Chairman of the meeting may at any time without the consent of the meeting adjourn the another time and/or place if, in his opinion, it would facilitate the conduct of the business of the meeting to do so."

If the Chairman of HKEx, Charles Lee Yeh-kwong, is a true believer in corporate governance and treating all shareholders fairly, then he should exercise his power to adjourn the meeting for 14 days.

The existing board will remain in place until the adjourned meeting is concluded. No shareholder would be disadvantaged by an adjournment, and all shareholders will then be given sufficient time to vote. No further candidates could be nominated in the new voting period, because the articles only allow nomination up to 7 days before the date appointed for the original meeting.

This principle of equality is also spelt out in IIA(3) of the OECD Principles of Corporate Governance which state:

"Processes and procedures for general shareholder meetings should allow for equitable treatment of all shareholders. Company procedures should not make it unduly difficult or expensive to cast votes"

In the notes to this principle (p33), the OECD goes on to warn that:

"Proxy materials may be sent too close to the time of general shareholder meetings to allow investors adequate time for reflection and consultation."

That is exactly what is going on here.

And if Mr Lee doesn't adjourn the meeting?

In the case of HKEx, to remove the conflict of regulating itself, there is a special Chapter 38 in the Listing Rules pursuant to which the Listing Rules applicable to HKEx are administered by the Securities and Futures Commission (SFC).

So we call on the SFC to show its mettle and require that the Chairman of HKEx adjourn the meeting in order to comply with the General Principles set out in Listing Rule 2.03. If the SFC so requires, but Mr Lee chooses to ignore this, then it will be just one more reason why HKEx is not fit to be a regulator of listed companies.

And after this, let's amend the Rules

This is yet another example in which the Listing Rules badly need reform. It should be possible for shareholders of listed companies to nominate directors at any time, and not have to wait until 28 days before the AGM, and similarly, there should be a deadline for nomination which gives investors sufficient time to make a decision, and for the company to send out a single proxy form listing all the candidates.

©, 2003

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